Welfare payments, liquidity constraints, and crime

Fritz Foley, 5 August 2008

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Consider an individual who receives support from welfare payments that occur once a month. Several recent papers indicate that this individual is likely to spend this income soon after receiving it and to face severe liquidity constraints. Dobkin and Puller (2007), Shapiro (2005), and Stephens (2003) find that recipients of government income support increase their consumption when these payments arrive and experience increasing marginal utility of consumption in between payments. Adams, Einav, and Levin (forthcoming), Duflo, Gale, Liebman, Orszag, and Saez (2006), and Barr (2004) present evidence that low-income individuals do not save very much and do not have access to credit that would allow them to overcome temporary cash shortfalls.

My research indicates that such welfare recipients deplete welfare-related income quickly and then turn to crime to supplement their income.1

Welfare payments and crime

Evidence supporting this conclusion comes from analysing data on daily reported incidents of crime from 12 US cities that differ with respect to the timing and frequency of welfare payments. The sample includes cities in which welfare payments are common; I require that more that 10% of the population receive payments from the Food Stamp program, which is the welfare program with the broadest coverage in the United States.

I use two approaches to identify the effects of the timing of welfare payments. First, I split the sample cities into those in which Food Stamp payments occur at the beginning of the month and those in which Food Stamp payments are more staggered. In some jurisdictions, for example, payments to different recipients occur on different days throughout the month while in other jurisdictions, most payments occur at the beginning of the calendar month. Although this sample split is somewhat crude, using it provides support for the hypothesis that individuals attempt to supplement welfare-related income with criminal income once welfare-related income has been deleted.

Figure 1 displays crime rates, computed by taking the number of reported incidents of crime on a particular day in a particular city and dividing that number by the sample period average number of daily reported incidents in the city, averaged over the first five days of the month and the tenth day through end of the month for different subsamples of the data.

Figure 1 Crimes rates over the course of the month

The first pair of bars illustrates rates early and later in the month for crimes that are likely to have a direct financial motivation in cities that make Food Stamp payments early in the month. Financially motivated crimes include burglary, larceny-theft, motor vehicle theft, and robbery. The rate of crime increases over the course of the month for this type of crime in these jurisdictions. However, the second pair of bars indicates that the rate of financially motivated crime does not exhibit a similar increase in jurisdictions where Food Stamp payments are more staggered. Finally, the two sets of bars on the right of the figure show that there are no pronounced patterns in other types of crime in either set of cities. The other types of crime analysed include arson, assault offenses, forcible sex offenses, and homicide.

In order to characterise the timing of payments more precisely, I use information on the delivery schedules of payments from the Food Stamp program, the Temporary Assistance to Needy Families program, and the Supplemental Security Income program to generate an index that reflects the average amount of time that has passed since welfare payments occurred in each sample city. The results of using this index to explain monthly patterns in crime indicate that crime rates are higher when more time has passed since welfare payments occurred. If all welfare payments were distributed on the 1st of the month, the results imply that crime rates would be 10.8% higher on the 31st of the month than on the 1st. Increases in crime over monthly welfare payment cycles are more pronounced for crimes that are likely to have direct financial motivations, and they are not observed for other types of crime. Therefore, the results do not seem to reflect reporting biases, police deployments, or other factors that would have similar consequences for patterns in all types of crime.

Policy implications

These results, along with the results of the recent work others have done on the consumption and savings behaviour of the poor, have immediate policy implications. Increasing the frequency of welfare payments would smooth patterns in crime. The levelling of criminal activity would make communities safer because police departments would not become overwhelmed by cyclical spikes. In addition, frequent payments would smooth the consumption patterns of welfare beneficiaries and, consequently, should reduce the extent to which they face dire circumstances because they consumed welfare-related income too quickly. As a result, more frequent payments would lower crime rates. As local and federal governments adopt the use of electronic benefit cards to distribute welfare payments, the costs of making payments more frequently is likely to be low.

The findings also have implications for the deployment of police officers. Many police departments have begun to use their incident data to deploy officers optimally across the jurisdictions they serve and to study the timing of criminal activity across hours of the day and days of the week. Less attention has been paid to monthly patterns. In jurisdictions where welfare payments are distributed at the beginning of the month, increased levels of criminal activity later in the month call for increased police protection at that time. Providing this protection requires fairly flexible labour laws that are not common in many cities or countries.

References

Adams, William, Liran Einav, and Jonathan Levin, forthcoming, Liquidity Constraints and Imperfect Information in Subprime Lending, American Economic Review.
Barr, Michael, 2004, Banking the Poor, Yale Journal of Regulation 21, pp. 121-237.
Dobkin, Carlos and Stephen Puller, 2007, The Effects of Government Transfers on Monthly Cycles in Drug Abuse, Hospitalization, and Mortality, Journal of Public Economics 91:11-12, pp. 2137-2157.
Duflo, Esther, William Gale, Jeffrey Liebman, Peter Orszag, and Emmanuel Saez, 2006, "Saving Incentives for Low and Middle Income Families: Evidence from a Field Experiment with H&R Block." Quarterly Journal of Economics 121:4, pp. 1311-1346.
Foley, C. Fritz, 2008, Welfare Payments and Crime, NBER Working Paper No. 14074.
Shapiro, Jesse, 2005, Is there a Daily Discount Rate? Evidence from the Food Stamp Nutrition Cycle, Journal of Public Economics 89:2-3, pp. 303-325.
Stephens, Melvin, 2003, “3rd of tha Month”: Do Social Security Recipients Smooth Consumption between Checks?, American Economic Review 93:1, pp. 406-422.


1 Foley (2008) develops and tests this hypothesis.

Topics: Welfare state and social Europe
Tags: consumption smoothing, crime, liquidity constraints, Poverty, saving, US, welfare

Comments

Effects on aggregate monthly crime rate

As long as Figure 1 reflects relative quantities, it says nothing about aggregate average monthly crime rate dependence on the way benefit payments are being made.
It would be nice to publish that data to, because, as long as policy implications go, having smooth patterns of crime is easier for police to handle, but if this "smoothness" cost would be higher overall crime rate, no one is going to pay such a cost.
I also wonder, why crime rates for other crimes are lower in 10th-end of month period than in 1st-5th ? Is it some statistical artifact?

Associate Professor in the Finance area, Harvard Business School